Bumi Armada (BAB) announced that it has been awarded the KG-DWN- 98/2 FPSO contract from India ONGC. This is within expectations as BAB was the sole bidder for this contract after SBM Offshore and MODEC both pulled out. We have yet to model in the earnings contribution from this contract, but cut our FY19-21E earnings to factor in the higher interest cost following the recent debt restructuring. Maintain BUY with higher TP of RM0.31.

Secured Long Awaited ONGC Contract

BAB has secured the KG-DWN-98/2 FPSO contract in a joint venture consortium with India’s Shapoorji Pallonji O&G, which BAB holds a 30% stake. The firm contract value is US$2.1bn (RM8.8bn) over a 9-year period covering both bareboat charter and O&M portions, with annual extension option of up to 7 years, valued at US$655m (RM2.7bn). This translates to a firm daily charter rate of US$640k/day. It was reported that the FPSO has been downsized to process about 50,000bpd oil (from an initial 77,000bpd) and storage capacity of 700,000 barrels (from an initial 1m barrels).

Positive on Contract Win, But Question Now on Funding

This contract is widely known to the market despite the skepticism, with an award a mere matter of timing as BAB was the only bidder for this contract. It is uncertain at this juncture how BAB is planning to fund this project. Assuming an estimated capex of US$1.3bn on 70:30 project funding, we estimate BAB would need to raise about US$120m (RM500m) for its share of equity. However, we continue to believe that equity raising via a rights issue is unlikely, and believe that it will be funded via the partial divestment of its existing FPSO, which is likely to be the FPSO Olombendo.

Maintain BUY

We slashed our FY19-20E forecasts by 13%-16% factoring in higher interest financing cost post its recent debt refinancing, which will see FY19 finance cost increase by RM40m (9 months impact) and FY20 and beyond by RM60m. Our earlier market contrarion view on the company was proven right when BAB was able to refinance its earlier debt. We maintain our BUY call with a slight higher target price of RM0.31 (from RM0.28), post rolling forward the valuation horizon. We have yet to factor in any earnings contribution from this contract pending further clarity on the undisclosed capex value and the funding approach. By our estimate, this ONGC contract could lift our valuation by another RM0.05/share, factoring only in the firm period.

Risks to Call

Key risks to our view include: (1) weaker-than-expected OSV fleet utilization, (2) continuous late deployment of subsea vessels, (3) termination of existing FPSO contracts.

Source: Affin Hwang Research - 7 May 2019